Comparative Advantage, Outward Foreign Direct Investment and Average Industry Productivity: Theory and Evidence

Hea-Jung Hyun and Yong Joon Jang
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Yong Joon Jang: Kyung Hee University

Korean Economic Review, 2015, vol. 31, 327-357

Abstract: This paper analyzes the role of comparative advantage in the effects of outward FDI on domestic productivity. In the theoretical framework, we place Helpman, Melitz and Yeaple��s (2004) outward FDI model into Bernard, Redding and Schott��s (2007) framework of international trade with heterogeneous monopolistically competitive firms and comparative advantage and show that the increase in outward FDI raises aggregate productivity in all industries through the in tra-sectoral reallocation of firms, but this productivity growth is more prominent in a nation��s comparative advantage industry. Using Korean industry-level data, we empirically test our theoret ical predictions using the production function model as a benchmark model, followed by system GMM estimation methods for sensitivity analysis. Our empirical findings also suggest that outward FDI has a positive effect on domestic productivity and this link is more likely to take place in those sectors above average competitiveness measured as export-based revealed comparative advantage.

Keywords: Direct Investment; Firm Hete rogeneity; Aggregate Productivity; Comparative Advantage (search for similar items in EconPapers)
JEL-codes: F12 F23 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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Working Paper: Comparative Advantage, Outward Foreign Direct Investment and Average Industry Productivity: Theory and Evidence (2012)
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